Pontiac school district finances to be reviewed by state, could lead to district-wide emergency manager

The Pontiac school district is about to undergo the first step in a process that could lead to the appointment of an emergency manager by the governor.

State Superintendent Michael Flanagan said he finds the district's financial situation "critical and alarming."

Flanagan notified Pontiac Superintendent Brian Dougherty and Board of Education President Carol Turpin in a letter that the state plans a preliminary review and analysis of the district's financial status beginning Monday April 29 and ending by or before May 24.

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Dougherty acknowledged the notice and said the scope of the preliminary review would be defined in a conference call Friday between Michigan Department of Education officials, Turpin, Dougherty and Paul Bryant, representing Plante Moran.

The new wrinkle comes at a critical time when the Pontiac district is trying to win state approval of a deficit elimination plan submitted a few weeks ago, and its effort to get a loan through the Department of Treasury against its anticipated tax revenue.

Pontiac school officials need the loan to pay off a $7.8 million court settlement before May 15, when the amount would be divided among property owners in the district and put on their summer tax bills. The district includes portions of eight adjacent communities.

Flanagan listed several major reasons for his order to review and analyze Pontiac school finances.

First, the deficit increased from $24.5 million on June 30, 2011 to $37.7 million on June 30, 2012, while the district's approved deficit elimination plan called for the deficit to be down to $26 million by June 30, 2012.

Flanagan also cited the fact that the deficit of $37.7 million represents approximately 50 percent of the district's current operating expenditures.

Also, the district's independent financial audit, which was due Nov. 15 as required by statute, was received more than four months late. This resulted in withholding of state aid until the audit was received.

Flanagan said the audit revealed material weaknesses in the district's financial operations and the cash flow continues to be distressed to a level that requires the district to receive an advance from its special education funds being held by Oakland Schools.

And finally, Flanagan pointed to the fact that the Michigan Education Special Services Association found it necessary to go to court to get a judgment in order to recover the millions it was owed for health insurance premiums as another major reason for his concern.

An interim report of findings must be provided within 20 days from the time the review starts, and the final report must be done 30 days from the start.

"To be clear, this is a preliminary financial review at this point; it does not automatically indicate that the end result would be for the governor to appoint an emergency manager for the district," Flanagan wrote in his letter.

Before that could occur, the Local Emergency Financial Assistance Loan Board would review the report.

If a finding of probable financial stress is made by that board, the governor would appoint a Review Team that would provide a report to the governor within 60 days of the review.

If the governor determines that a financial emergency exists, the board has options. It can sign a resolution to: negotiate a consent agreement, to have an emergency manager appointed, to undergo a mediation process or to initiate a Chapter 9 bankruptcy.

If an emergency manager were appointed, the district would be one of several in the state whose finances are under the control of a state-appointed receiver.

The school districts in Detroit, Highland Park and Muskegon Heights have emergency managers, and the latter two districts' operations have been outsourced to third-party charter school companies.

The City of Pontiac's finances, meanwhile, have been under state supervision since March 2009. Emergency Manager Lou Schimmel has said he plans to leave City Hall by June 30.

"This is just a very difficult situation that many, many urban districts find themselves in," said Oakland Schools Superintendent Vickie Markavitch, who has been working to assist Pontiac schools in its effort to get out of deficit.

"In my opinion, that was certainly made more difficult by choice," said Markavitch, referring to Schools of Choice, which allows parents to send their children to charter schools or any other district that is taking students from outside their district boundaries.

"Slowly, choice has been puling students out of urban centers," Markavitch said, noting the state has allowed "people who have gas money to drive away rather than putting more resources into the system to help improve it."

The Pontiac school district's enrollment is expected to be around 4,700 students in the fall, compared to 20,000 in the early 1970s.

"I don't even know that an (emergency manager) is the answer," Markavitch said, when the district has already taken many measures to cut costs and has class sizes of 30 students.

"I don't know that we as a state have decided that we want these urban districts to survive," Markavitch said.

"The cost of operations goes up, and students left behind are disproportionally students with special needs who cost more to educate, which exacerbates the problem," Markavitch said. The district's at-risk funding has been cut every year.

Markavitch said it would help if the state was flexible with the deficit elimination plan and gave the district a year or two longer to reduce the deficit.

Bob Moore, deputy superintendent of finance for Oakland Schools, pointed out that unions in Pontiac schools have made concessions and that should shrink the deficit this year.

"The question is, can they go fast enough to keep enough cash to operate on, and I'm sure the preliminary review is going to look at that," Moore said.

Moore said "if there was a 1 percent increase in the (state) foundation grant, it would put $5.2 million more in Pontiac to help solve the problem.

"But, I've seen a decrease. It is difficult trying to dig out while funds are being taken away," said Moore. He said the district is trying to climb out of a hole while the incline keeps getting steeper.

Oakland Schools' Markavitch said: "It is very sad to watch this happen, even though people in the district continue to work very hard around issues of learning."

Markavitch said over the last eight years, while the district has been trying to get out of debt, "they have actually raised math and reading scores by 18 and 20 proficiency points, even though the population is high poverty and a higher proportion of special needs."